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We are about moving with velocity - speed and direction - towards your financial goals, but not rushing through life.Wed, 25 Feb 2015 19:53:44 +0000en-UShourly1http://wordpress.org/?v=4.1.1Week In Review 2/20/15http://permanentvalue.com/2015/week-in-review-22015/
http://permanentvalue.com/2015/week-in-review-22015/#commentsFri, 20 Feb 2015 21:15:04 +0000http://permanentvalue.com/?p=2613The Cascade Effect of Europe’s QEQE Begins in Europe
After months of hinting and speculation, the European Central Bank (ECB) finally embarked on a new quantitative easing (QE) program that is massive in both size and scope. QE by itself probably won’t solve Europe’s chronic economic malaise, though it should mitigate the risk of deflation and support European exporters through a weaker euro. The reach of the €1 trillion-plus program, however, extends beyond the continent; the impact will be evident in holding down global bond yields.

Monetary Policy, Two Ways
As we have discussed for some time now, central banks are taking increasingly divergent paths with their monetary policies. On the easing side, China, Denmark, India and others joined Europe and Japan in taking steps to address deflationary threats and bolster slowing economies. On the tightening side, besides Brazil and its three recent rate hikes, the Federal Reserve (Fed) is the only major central bank preparing to raise interest rates this year. As the disparity deepens, we expect markets to remain volatile, especially currency markets. Equity markets with central bank support are well positioned, such as in Europe and Japan, while challenging times could be ahead for those without such backing.

Cheaper Oil Is a Good Thing, for the Most Part
Another major shift to the investment climate has been the plunge in oil prices, which stirred up much market volatility and prompted questions about the strength of the world economy. However, prices seemed to have stabilized in recent weeks on reports of lower output, which could help ease some of the anxiety. Remember: Cheaper oil is a boost to consumer spending and global growth.

Opportunities in International Stocks, Credit
Given the market dynamics, it makes sense to look outside the United States for value, where central bank accommodation is keeping equity markets buoyant and where plenty of bad news is already baked into valuations. While investors continue to favor U.S. Treasury debt, we prefer the credit corners of the bond market that offer the prospect of higher income.

Sports and numbers go together, but this year that seems to be more true than ever with the hullabaloo over the deflated footballs used by the New England Patriots in the AFC championship game.

It’s likely that few fans knew the balls were to have air pressure of 11.5 to 13.5 psi, or that putting 2 pounds less in a ball would make much difference to quarterbacks and receivers.

Deflate-gate took over the conversation last week, but as the game gets closer, breakdowns of the Patriots and the Seattle Seahawks and their strengths and weaknesses have received some attention.

This year, we scoured the Web to find 10 Super Super Bowl Numbers. If the game is one-sided, maybe these fun facts can keep the conversation going.

$2.19 billion: Amount of ad revenue generated over the past decade.

That’s the amount of ad revenue generated over the previous decade, The Wall Street Journal reported, and the price of a 30-second commercial is up 75% over that same time period. This year, that amount of time can be had for $4.5 million, up $300,000 from last year.

1.25 million: Expected number of chicken wings that will be consumed.

That’s a lot of chicken wings, but Americans are up to the task of eating every last one of them on Super Sunday. The National Chicken Council says that’s enough to put 572 wings on each seat in all 32 NFL stadiums. The council says Seattle fans are 17% less likely than those in other cities to eat wings and those in Boston are 8% less likely. And don’t forget the 9 million pounds of guacamole and the accompanying chips.

25.3 million: The number of tweets sent during last year’s Super Bowl by 5.6 million people. The game was watched by 112.2 million people in the U.S.

$18.3 million: Profit expected for Las Vegas casinos, as reported by WalletHub, on bets of $115 million. And bettors don’t only focus on who will win or lose the game. Vegas offers more than 350 so-called prop bets, on everything from whether the coin flip will land heads or tails to the length of the National Anthem. For the record, the average time for the anthem is 116 seconds.

3,734,938: That’s the number of people who have attended a Super Bowl game. The largest crowd was 103,985 fans at the 14th game, played at the Rose Bowl in Pasadena, California, the Associated Press reported.

1.5 million: The number of people expected to call in sick on Monday, according to Kronos. Another 4.4 million might show up late. HR professionals beware.

10,000: The number of volunteers enlisted to help make the big game and the events leading up to it go off without a hitch. The volunteers work at Super Bowl Central in downtown Phoenix, manning social media and performing other duties.

253: The percentage increase in online viewership of Super Bowl ads since 2010, according to Inc. The website adds that online viewing increases the reach of an ad by 48%.

50 or is that L? What’s in a number? Quite a bit, evidently. The NFL is making a change next year for the 50th Super Bowl. Say goodbye to Roman numerals, at least for a year. The NFL said a simple L on the game’s logo just didn’t look right. The game will be played in the home stadium of the San Francisco 49ers. The first game was played in Los Angeles but, alas, there is no team in that city to host the 2016 title game.

20: Percentage increase in antacid sales the day after the big game. It’s no wonder, as was noted on the page about chicken wing consumption.

The euro area and Asia should benefit most from lower oil prices, while the US should benefit but less so than in the past given recent energy investments. The impact on emerging economies should be mixed.

We have reduced our US inflation forecast for 2015 as the labor market tightens. The Fed should begin gradual rate hikes in the second half of the year.

The euro-area economy should enter a renewed recovery phase in the first half of 2015 thanks to low oil prices, low interest rates, and easing credit conditions.

Following the December elections in Japan, structural reforms should continue. The Bank of Japan may have to begin tapering bond purchases in 2015.

After several years of out performance by the US equity market, conditions may be in place for improved fundamentals leading to better relative equity performance in both Europe and Japan.

Lower oil prices should at least partly offset a tightening of monetary policy in the US, helping to support US equities.

Concerns about low developed-world inflation have intensified into worries about disinflation, and even outright deflation, as a result of tumbling oil prices.

The Fed appears prepared to initiate rate hikes in 2015, while the European Central Bank and Bank of Japan, more sensitive to the threat of deflation, seem headed for increased policy stimulus.

- Source: Hartford Funds

THIS WEEK’S ECONOMIC DATA

China Merchandise Trade Balance: December unadjusted merchandise trade surplus was $49.6 billion, down from $54.47 billion in November. Exports were up 9.7% on the year after increasing 4.7% in November. Imports slumped 2.4% after increasing 6.7% the month before. For 2014, the trade surplus jumped to $382.5 billion from $259.75 billion in 2013.

U.K. CPI: Consumer prices were slightly softer than expected in December. An unchanged level versus November was weak enough to shave fully 0.5% off the annual inflation rate, which now stands at just 0.5%.

U.K. Producer Price Index: Manufacturers’ input costs and factory gate prices fell again in December. December followed a shallower revised 0.7% drop in November with a monthly 2.4% decline at year-end. Annual input price inflation now stands at -10.7% and its factory gate equivalent at -0.8%.

EMU Industrial Production: Industrial production (ex-construction) eked out a third consecutive monthly rise in November. A marginally firmer than expected 0.2% increase followed an upwardly revised 0.3% gain in October.

U.S. Retail Sales: December sales fell 0.9% after posting a 0.4% gain in November and a 0.3% rise in October. Expectations were for a 0.1% decline.

U.S. Jobless Claims: Claims jumped sharply the week of January 10, up 19,000 to 316,000.

U.S. PPI-FD: Inflation at the producer level continued to decline in December on lower energy costs. The PPI for total final demand fell 0.3%, following a decline of 0.2% in November. The consensus expected a 0.4% decrease.

U.S. Consumer Price Index: Inflation fell another 0.4% in December after falling 0.3% in November.

U.S. Industrial Production: Slipped 0.1% in December following a jump of 1.3% in November.

The US labor market added 252,000 net, new nonfarm payroll employees in the month of December and the unemployment rate fell to 5.6%. December’s data caps off a year in which an additional 3 million Americans found their way onto the payroll. Other parts of the report were weaker than expected, including a disappointing deceleration in wage growth and falling labor force participation. In total, today’s report offers up important clues about how we ought to think about the US economy in 2015, but doesn’t give the Fed much of a reason to change the trajectory of monetary policy.

As we look forward to 2015, we think analysts and investors would do well to heed the lessons learned in 2014. Standard economic models tell us that as the labor market strengthens, employers have to pay employees more (driving up wages,), more people are able to find employment (the participation rate rises), and the increased aggregate employment brings about rising prices (inflation, particularly as the unemployment rate falls below the so-called “natural rate” which was viewed to have moved higher in the aftermath of the recession).

The only problem: none of those things happened. After a year in which Americans saw the strongest growth in nonfarm payroll employment since 1999, the pace of wage growth slowed, participation remained stable and inflation held at its depressed level. Job growth arrived without the much-feared inflation.

We would just ignore the entire episode and chalk it up to another failure for macroeconomic forecasting, but there’s one problem: investors believed the story. Fears that inflation was “just around the corner” inspired forecasts for higher interest rates in 2014 and frightened some fixed income investors. As we now know, interest rates in the US rallied throughout the year—the 10-year Treasury began the year with a yield to maturity of 3.04% and ended the year at 2.17%—in large part because of lackluster inflation.

For the Fed, we do not think today’s report changes much. Yesterday’s minutes from the December FOMC meeting confirmed that Yellen and Co. would be comfortable raising interest rates sometime this year even if inflation is below their 2% target (as it has been for 71 of the last 74 months), so long as inflation expectations stay anchored. Our suggestion for 2015: watch the survey measures of expected inflation closely. If they begin to decline, even despite the improvement in the labor market, the Fed may be more “patient” in hiking interest rates than the market currently expects

- Brenda J. O’Leary, Payden Mutual Funds

THIS WEEK’S ECONOMIC DATA

U.K. PMI Construction continued to expand in December. However, at 57.6, the sector PMI was below market expectations and November’s unrevised 59.4 mark and also touched its lowest level since July 2013.
China PMI Composite posting 51.4 in December, up from 51.1 in November. This signaled increased business activity for the eighth straight month.
E.U. PMI Composite for December was at 51.4, down 0.3 points versus its flash estimate 51.7. This final composite output index signaled a sluggish year-end for the Eurozone economy.
E.U. HICP Flash for December was at minus 0.2%. This yearly change in the flash HICP was down 0.5 percentage points from November and below market expectations.
U.S. International Trade balance narrowed more than expected due in part to lower oil prices. In November, the gap narrowed to $39.0 billion from a revised $42.2 billion in October. Market expectations were for the deficit to narrow to $41.5 billion.
U.S. jobless claims fell by 4,000 to 294,000 for the week of Jan. 3.
U.S. employment situation was somewhat stronger than expected as payroll jobs advanced 252,000 after jumping a revised 353,000 in November.

Except for the hub-bub over the Tax Extenders bill being passed by Congress, the biggest news of the fall concerning taxes turned out to be a story on a parody website claiming refunds would be delayed until Oct. 15. That didn’t stop the social media universe from obsessing over the idea that the Obama administration would do such a thing in an effort to save millions of dollars. The rumor was so persistent that a Forbes writer felt the need to debunk it.

The real changes to the tax code for 2015 are mostly incremental and were set by Congress as indexing to inflation. Even past nightmares like annual political wrangling over the Alternative Minimum Tax have at least been stabilized.

There are some changes that taxpayers and their advisors should be aware of, said Bernard Kiely, of Kiely Capital Management, based in Morristown, N.J. One concerns withdrawing money from one IRA to roll it into another.

“The IRS clarified a rule this year,” Kiely said. “After losing a court decision, they made a rule that a withdrawal could be made from only one account per year.”

The idea, Kiely said, was to ensure that people wouldn’t remove money earmarked for retirement from multiple accounts — a practice that, as Michael Kitces pointed out, could be abused by account holders needing a free, short-term loan.

Kiely advised that a trustee-to-trustee transfer be used instead of a 60-day IRA rollover. That sort of transfer can be done for multiple accounts in the same tax year.

For Kiely, the biggest change involves a program the IRS put in to certify tax preparers. Those who don’t complete 18 hours of continuing education each year won’t be allowed to represent clients at audits.

“There are too many people out there preparing taxes who don’t know what they are doing,” Kiely said, adding that the voluntary program is a good idea.
Here’s a rundown of 6 Top Tax Changes for 2015:

1. Alternative Minimum Tax
This exemption amount rises this year to $53,600 (up $800) for singles and $83,400 (up $1,300) for married couples filing jointly.
There was a time when fear of the expiration of this tax sent shockwaves through many taxpayers. Congress would delay and delay fixing it (doesn’t that sound familiar?) But now that it is indexed to inflation, the worry has been removed.

2. Estate Tax
The exclusion amount for those who die in 2015 rises to $5.43 million, up from $5.34 million the previous year.
The so-called death tax doesn’t affect most people, but an unusual tax levied by New Jersey, which starts at $675,000, might be a factor in upper income individuals wanting to leave the state. Kiely cited a white paper by Regent Atlantic Capital, based in Morristown, that supports the idea that New Jersey’s high taxes, including the estate and inheritance levies, are a drain on the state.

3. Top Tax Rate
The top rate of 39.6% will apply to singles who earn more than $413,200, up from $406,750 in 2014, and $464,850 for married couples filing jointly, an increase from $457,600.
Before tax brackets were indexed for inflation, Kiely said, “tax bracket creep” was a problem. Indexing keeps the brackets in pace with inflation.

4. Standard Deduction
Both single and married couples filing jointly will see a slight increase in the standard deduction. For singles, the increase is $100 to $6,300. For married couples it’s $12,600, an increase of $200. For heads of households, the deduction will be $9,250, up $150.
The rise in this is tied to inflation, which makes planning easier, Kiely said.

5. Personal Exemption
There’s a $50 increase in store from $3,950 in 2014. The personal exemption is phased out as adjusted gross incomes rise before being eliminated at $380,750 for singles and $432,400 for married couples.
Kiely noted that the phase out in upper income levels is automatic.

6. Itemized Deductions
The limitations start at adjusted gross income of $258,250 for singles and $309,900 for married couples filing jointly.
The automatic reduction was brought back for the 2013 filing season, leaving upper income earners with bigger bills from the federal government.

With gas hovering around $2 a gallon in many parts of the country, chances are you’re smiling every time you fill up the tank.

The oil price drop, which is one of the biggest stories of 2014, is a twist on a familiar tale. Rising supply (production in non-OPEC countries, like the United States, increased) and falling demand (in Europe, Japan, and China) caused prices to move lower. In this case, they’ve moved a lot lower. Last summer, the price of crude oil was about $107 a barrel. Last week, it finished below $55 a barrel.

Overall, according to the International Monetary Fund (IMF), lower oil prices are expected to be good news for the global economy. They’re expected to have economic benefits for countries that import a lot of oil, like China and India. They also are a boon for U.S. consumers who have more money in their pockets when they pay less at the pump.

However, low oil prices aren’t good for everyone. In the United States, oil-producing states like Texas, Louisiana, Wyoming, Oklahoma, and North Dakota may lose jobs and tax revenues. Outside the United States, oil exporters like Russia, Iran, Nigeria, and Venezuela are likely to suffer adverse consequences as a result of falling prices, including domestic unrest, according to MarketWatch.com. The International Energy Agency (IEA) said,

“…For producer countries, lower prices are a negative: the more dependent on oil revenues they are and the lower their financial reserves, the more adverse the impact on the economy and domestic demand. Russia, along with other oil-dependent but cash-constrained economies, will not only produce less but is likely to consume less next year.”

The supply and demand equation isn’t likely to change soon. The IEA forecasts global demand growth will be relatively weak during 2015. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has done nothing to reduce supply, largely because of Saudi Arabia which is the second largest oil producer in the world. Saudi has reserves that make it better able to absorb the oil price shock than other oil exporters. It also has political motivations to keep oil prices low. These include punishing Iran and Russia for supporting Bashar Assad in the Syrian Civil War, according to the International Business Times.

If you want to know where oil prices may go, keep an eye on Saudi Arabia.

IT’S NOT THE 1 PERCENT, IT’S THE 0.1 PERCENT. They say history repeats itself. That seems to jibe with the findings of a brand new paper by Emmanuel Saez of the University of California, Berkeley, and Gabriel Zucman of the London School of Economics.

“Wealth concentration has followed a U-shaped evolution over the last 100 years: It was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012—a level almost as high as in 1929… The increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality.”

The pair found that the average real growth rate of wealth for the 160,000 families that comprise the top 0.1 percent was 1.9 percent from 1986 to 2012. As it turns out, income inequality has a snowballing effect on wealth distribution. The wealthiest people earn top incomes and save at high rates, which helps concentrate greater wealth in the hands of a few. It’s interesting to note that top wealth-holders are younger today than they were in the 1960s.

In contrast, the riches of the bottom 90 percent did not grow at all from 1986 to 2012. Historically, the share of wealth divvied up among this group grew from 20 percent in the 1920s to 35 percent in the 1980s. However, by 2012, it had fallen to 23 percent. Pension wealth grew during the period, but not enough to offset the rapid growth of mortgage, consumer credit, and student loan debt.

Weekly Focus – Think About It

“History repeats itself, but the special call of an art which has passed away is never reproduced. It is as utterly gone out of the world as the song of a destroyed wild bird.”–Joseph Conrad, Polish author

THIS WEEK’S ECONOMIC DATA

U.S. existing home sales declined 6.1% in November to a 4.93 million annual rate.

U.S. GDP for the third quarter was revised sharply higher to 5.0%.

U.K. GDP expanded at an unrevised 0.7% for the third quarter.

U.S. durable goods dipped 0.7% in November after rising 0.3% in October.

U.S. personal income advanced 0.4% in November after growing 0.3% in October.

U.S. new home sales came in below low-end expectations, down 1.6% in November to an annual sales rate of 438,000.

U.S. jobless claims claims fell 9,000 in the December 20 week to 280,000, helping to pull down the 4-week average by 8,500 to 290,250.

It was no fun to be an investor last week. The week prior, a commentary in The Wall Street Journal’s blog, MoneyBeat, offered this insight:

“Falling oil prices are thought to be good for stocks because they stimulate consumer spending and hold down inflation. The lower costs support economic growth, boost corporate earnings, and lessen pressure on the Federal Reserve to raise interest rates. The stock market loves that mix.”

That was not the case last week. A selling spree, sparked in part by concerns related to energy, led to virtually every major world stock index (every one that Barron’s follows, anyway) moving lower. The single exception was the Shanghai Composite and that was flat.

It seems the International Energy Agency’s prediction that demand for energy would grow more slowly in 2015, combined with the fact supply of some resources has been growing, addled investors and they sold everything but the kitchen sink. Even industries that may be helped by lower energy costs – consumer goods, consumer services, health care, and others – lost value. In the United States, stock markets delivered their worst performance in more than three years, according to Barron’s.

Have investors lost sight of the fact the United States has a consumption-driven economy?
The Federal Reserve Bank of St. Louis reported personal consumption – how much Americans are spending on goods and services – was 70 percent of gross domestic product (the value of all goods and services produced) in the United States during the third quarter of 2014. Lower energy prices tend to put more money in the pockets of consumers so they can spend more and that can help the economy grow. In fact, U.S. News reported, “…approximately every penny decline in the price of a gallon of gasoline translates to about $1 billion in additional disposable income for American households.”

It’s interesting to note consumers – a group that overlaps with investors in a Venn diagram – are more confident than they have been in almost eight years, according to data released by the University of Michigan and cited by Barron’s.

WHAT DOES THE FUTURE HOLD?

The good news is most analysts expect economic growth in the United States to continue. The Wall Street Journal, The Economist, The Federal Reserve, and the International Monetary Fund all have forecast gross domestic product growth in the United States at 2.5 to 3.0 percent for 2015. That’s not quite as good as the 7 percent growth forecast for China or the 6.5 percent growth estimated for India, but it’s decent for a developed nation with a mature economy.

There are factors that could hurt the economic outlook in the United States. Economists participating in The Wall Street Journal’s Economic Forecasting Survey said a negative global event was the biggest threat to U.S. economic growth followed by slower global growth. Three of the risks The Economist believes could keep companies from operating at target profitability during 2015 include:

• Deflation in the Eurozone: “A Japanese-style stagnation in the euro zone would have profoundly negative implications for global demand, especially at a time when growth in the emerging markets is also softening.”
• Spillover from Syria’s Civil War: “…The prospect of [ISIS] diverting its energies from Iraq and into Syria and its neighbors (such as Lebanon and Jordan) could prompt an uptick in oil’s political risk premium once more.”
• Escalation of the Russia-Ukraine conflict: “…The recently imposed trade restrictions have not only plunged Russia into recession, but also contributed to sinking industrial output in Germany… further sanctions could see Russia cutting off natural gas sales to Ukraine or the European Union (as is currently already reportedly occurring with supplies to Poland)… [these acts] would no doubt have a deleterious impact on the [Euro] region’s economic recovery.”

There are also factors that could improve the outlook. The Wall Street Journal’s survey found economists believe tightening labor markets, higher wages, better consumer spending, and low energy prices could support U.S. economic growth during 2015.

- Peak Advisor Alliance

Weekly Focus – Think About It

“The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don’t play together, the club won’t be worth a dime.–Babe Ruth, American baseball player

Investors age 65 and above experienced the biggest increase in retirement savings compared with those from other age groups as the stock markets soared this year, according to a study by Hearts & Wallets. People in the 65-74 age group saw their retirement assets climb to $3.5 trillion this year from $2.3 trillion last year, the study finds. U.S. households posted a 16% increase in investable assets last year, with total assets valuing $41.2 trillion, the research also finds. –Time Money

There’s a lot not to trust about annuities

Sales pitches about annuities can distract retirement savers from making an informed investing decision, writes Stan Haithcock of MarketWatch. Instead of listening to advertisements, seminar presentations and agents, clients are advised to read the annuity contract or policy, Haithcock writes. “There are no surprises, secrets, or hidden gotchas in the contract. Nothing is over hyped or bullet pointed in the policy. There are no hypothetical, theoretical, projected, back-tested, or hopeful return scenarios in the annuity contract.” –MarketWatch

4 ways your home can help fund retirement

Clients can boost their retirement savings by making wise housing decisions, according to this article in U.S. News & World Report. Retirees can live on a limited budget if they have paid off their mortgage, which could add substantially to their expenses. They may also consider downsizing or relocating to a place with lower cost of living. Renting is another viable option if they want to sell their homes to augment their retirement savings. –DailyFinance

Best Social Security strategies for married couples

A married couple can boost their retirement benefit payments from Social Security if they know how to optimize their spousal benefits, according to this article on Kiplinger. One of them may file for and suspend his retirement benefit until age 70 so the spouse can receive spousal benefit on his record. Another strategy is restricting an application, in which the lower-earning spouse files for her retirement benefit so the higher-earning spouse can claim spousal benefit on her record and defer his own retirement benefit. –Kiplinger

- Source: Financial Planning

THIS WEEK’S ECONOMIC DATA

The Institute for Supply Management manufacturing index slipped to 58.7 in November, down from 59 the previous month.

Most Americans do not have adequate understanding about retirement as illustrated by the low scores in a test designed to gauge their knowledge in planning for the golden years, according to a report from the New York Life Center for Retirement Income at The American College. Despite the lack of knowledge, many of the respondents show a high level of confidence about their financial ability to plan for retirement, the report says. This mismatch of knowledge and confidence is a serious problem, says David Littell, the Director of the New York Life Center for Retirement Income, as it can lead to uninformed retirement planning decisions. Littell notes that Americans struggled to answer basic retirement planning questions in key areas such as Social Security benefits, annuities, retirement investments, longevity, and long-term care planning. –Forbes

The powerful (and expensive) allure of guaranteed retirement income
Since the Great Recession, investors have chosen investments with a guarantee over those that promise higher growth potential but carry a greater risk, according to a recent study. As such, clients who invest their retirement savings become more interested in annuities while experts are pushing for annuities to be included in employer-sponsored defined-contribution plans. –Time Money

Playing 401(k) catch-up might cost you $1 million or more
Workers in their 50s are allowed to make catch-up contributions to their 401(k) plans to boost their savings and prospects for a comfortable retirement, according to this article on DailyFinance. However, younger workers need to max out their 401(k) contributions to take advantage of compound interest, which enables their money to grow over the years. –DailyFinance

Best strategies to boost your Social Security benefits
There are a number of effective claiming strategies for people to maximize their Social Security benefits, according to an article on Kiplinger. The retirement benefit will be based on the earnings in the 35 highest-paid years, the age to file for benefits, and marital status. When choosing the right strategy, clients need to account for these variables, as well as the possibility that they may live longer than expected. –Kiplinger

- Financial Planning

THIS WEEK’S ECONOMIC DATA

U.S. GDP rose at a 3.9% annual pace in the third quarter – up from a previous estimate of 3.5%.

U.S. consumer confidence fell to 88.7 in November, down from 94.1 in October.

Germany’s GDP rose 0.1% in the third quarter, up from a 0.1% contraction in the second quarter.

U.S. consumer spending rose 0.2% in October.

First-time U.S. jobless claims were up 21,000 to 313,000 for the week ending Nov. 22.

U.S. inflation rose 1.4% over the past 12 months, as measured by the personal consumption expenditures index. Core PCE inflation, which excludes volatile food and energy prices, was up 1.6%.

U.S. durable goods orders rose a seasonally adjusted 0.4% in October, due primarily to a spike in bookings for military aircraft.

Let’s be honest: No one likes to pay taxes. It’s not an enjoyable experience to have a portion of the wealth you’ve been creating extracted and sent to the government. But in the broad scheme of things, if you’re paying taxes on your investment portfolio, it’s good news. That’s because you pay taxes when your portfolio is up — when you’re making money.

While you should manage that tax impact to minimize any negative effects, the simple truth is that the more you’re paying in taxes, the more you’re creating in wealth. The single most effective way to avoid paying taxes is to lose money year after year, and you certainly don’t want to do that.

2. The benefits of tax loss harvesting are often overstated.

There is value in trying to manage tax exposure along the way, and one of the most popular ways of doing that is to harvest capital losses. Obviously, harvesting losses isn’t good news, ultimately, since it means you lost money on your investment (it’s like a consolation prize from the government for losing money). Nevertheless, investments go up and down and sometimes there are opportunities to take advantage of the declines.

The important thing to remember when you perform loss harvesting is that the technique results in a tax deferral, not a tax savings.

In a lot of situations, people believe that loss harvesting is creating wealth for them or saving them on taxes. Technically, that’s not the case, as every tax dollar you’re saving now will have to be paid back in the future when that investment recovers. That’s not to say that loss harvesting is worthless, but rather, that the opportunity it offers is tax deferral — that $3,000 in your pocket now (which you can invest and grow) in exchange for $3,000 paid in the future to Uncle Sam. So while there is value in tax loss harvesting, it is often exaggerated.

While it’s often a good idea to defer taxes when you can, there are situations where the best thing you can do is actually pay the taxes earlier. This comes as a result of the 2013 changes in tax law which moved us from a historical two tax bracket system for capital gains — a low bracket of 5% or 0% for lower income Americans, and 15% for everyone else — to what is effectively a four bracket system today. Currently, we have 0%, 15%, 18.8% (for those also subject to the 3.8% Medicare surtax on investment income), and 23.8% (the 20% top capital gains rate combined with the 3.8% surtax).

The reason why a four bracket tax structure is so important is that if we do too good a job pushing our capital gains down the road, we could actually finish with less money. For example, imagine a portfolio that’s growing well at $50,000 a year in gains. You may think you don’t want to sell any of those gains right now, because you don’t want to pay the taxes. A $50,000 yearly gain is something you might be able to pay at the lower 15% rate, if you’re in a moderate tax bracket. However, if you push that down the road 10 years, you’ll no longer have individual $50,000 gains, but one massive $500,000 gain, which would bump you right up into the 23.8% bracket. As a result, you’ll actually pay more in taxes than you would have by simply paying at the lower rate each year.

This is a very important planning issue when you’re trying to manage portfolios on a tax efficient basis. When your income is high, then there’s little problem in deferring the taxes. But when your income is low, it may be more beneficial to harvest the gains and fill up those lower tax brackets so you can avoid being pushed into a higher tax bracket in the future.